We started our business off of another family business making us basically a subcontractor to them. They gave us a business loan interest free and payments on this loan back to the customer/family will be in the form of a 10% discount off the invoice for each job we do for them. What is the best way to record the loan and then apply the discount on the invoice to the repayment of that loan
- Create a liability account for the loan.
- To record receipt of the money, use
Receive moneyin a cash account. Allocate the transaction to the liability loan account created in #1. This debits your cash account, thus increasing it, and credits your loan account, increasing it as well.
- When creating a sales invoice to the customer/lender, enter the full amount of the sale and allocate to an income account so that your stated income is correct. Add another line for the discount, entering a negative amount equal to the 10% discount. Allocate the discount line to the loan liability account. The first line debits
Accounts receivableand credits the income account. Because it was entered as a negative number, the discount line also debits the loan account.
Accounts receivablewill show the reduced amount owed to you by the customer/lender, as will the sales invoice.
Thank you. I had already set up a long term liability for the loan but couldn’t figure out how to apply the discount to the customer on the invoice to the loan as payment. This made sense and I have adjusted the invoices accordingly. Thank you for the quick response and an answer that made sense.
Sorry but I have another question regarding the businewss loan. I have the liability account set up and the repayment as 10% off the loan balance on the invoices is working. What I want to know now is if I deposited the loan money in the business account and then purchased computers and equipment and paid for them out of the business account do I need to do anything to record that the money used was the money received from the loan?
I allocated the purchases made to the account “computer equipment” or “fixed or intangible assets” but in the “liability account” for the loan it is only showing the starting loan balance and the payments applied to reduce the loan. Should I make journal entries to the liability account to show what I purchased with the loan? I don’t want to have an inaccurate accounting of the business for my accountant and I think the way I have it currently it is okay but I didn’t know if I needed to specify somewhere exactly what the loan was used for.
I hope that makes sense.
No. Money is money. Keeping track of what it is for and where it went is why we have various accounts.
No. That liability account is just an accounting artifice. It tells you that you incurred a liability for the loan principal amount and that you have, transaction by transaction, discharged the liability. It does not represent money. In fact, in your case, no actual money is moving to discharge the loan; you are doing it through discounts. Money is represented in a cash account.
Keep doing what you are doing. Your accountant will be happy.
Thank you for the quick reply and the compliment. I’m not sure how happy my accountant is right now I’m trying to get the reports in order to send him. LOL We just started the business in October and I waited way too long to be sure everything was recorded correctly, most items are but I have had to go back and edit,delete and add a few things. I’m new to accounting (other than managing home finances) and to manager so there has been a bit of a learning curve especially regarding double entry and the cash vs accrual, but it is starting to make sense.
I really like Manager, as someone who is new at this it is actually easy to use once you learn the program and lingo. My accountant recommended I use quickbooks but the learning curve on that was much higher and I couldn’t wrap my head around it. Manager is awesome and as our business grows I’d like to upgrade to the cloud or server addition, my current computer is about to bite the dust and while I have made a back up I’d feel better with one of the other options just in case.
Thanks again for the quick response I love the forums and all the help that is available here.